When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Tripadvisor (NASDAQ:TRIP), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tripadvisor:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.074 = US$144m ÷ (US$2.7b - US$792m) (Based on the trailing twelve months to September 2024).

So, Tripadvisor has an ROCE of 7.4%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

View our latest analysis for Tripadvisor

In the above chart we have measured Tripadvisor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tripadvisor for free.

What Can We Tell From Tripadvisor's ROCE Trend?

In terms of Tripadvisor's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tripadvisor becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 29%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In summary, it's unfortunate that Tripadvisor is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 51% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Tripadvisor could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for TRIP on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.